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A  Treatise  on 

COST  ACCOUNTING 

As  Applied  to 

Coal  Mining 


J.  J.  ROBY 

Efficiency  Engineer 

(Coal  Mining  Operations) 
Leader-News    Building 

Cleveland 

Copyright  1918  Price  $5.00 


Charts  showing  comparison  between  proper  method  of  computing  cost  and 
method  commonly  employed  by  operators 


Note — Operators  will  find  it  an  advantage  to  graphically  show  the  results  of  their  operation  in  the 
manner  illustrated  by  Chart  B,  with  the  addition  of  a  SeUing  Price  line.  To  do  so  will  prove  a  better 
guide  than  mere  figures. 


Cost  Accounting  as  applied  to  Coal  Mining 


Believing  that  investors  in  coal  property  suffer  serious  losses  from  the  operation  of  mines  through 
lack  of  a  proper  and  uniform  method  of  computing  the  cost  of  production,  I  submit  this  work  with 
the  view  that  it  will  enable  Coal  Operators  to  accurately  determine  the  cost  of  producing  a  ton  of  coal 
and  the  proper  selling  price  thereof. 

In  dealing  with  the  subject,  I  have  considered  that  the  Investor,  or  Coal  Operator,  is  entitled  to 
charge  a  price  for  his  product  that  will  cover  all  cost,  including  interest  on  the  investment,  the  risks 
of  the  industry,  the  return  of  the  investment  during  the  life  of  the  operation,  and  a  profit  equal  to  that 
realized  in  other  industries. 

Giving  due  consideration  to  the  public,  or  buyer,  (always  an  interested  party  in  any  question),  the 
fairness  of  the  suggestion  may  be  seen  by  reference  to  the  decision  of  the  late  Judge  Tayler  in  the 
recent  Street  Railway  controversy  in  the  city  of  Cleveland,  which  was,  substantially  and  briefly,  that 
the  owner  was  entitled  to  charge,  for  its  service,  rates  that  would  pay  all  cost  of  operation,  mainte- 
nance and  renewals  to  keep  the  property  intact,  and  6%  interest  on  the  property  value  which  is  increased 
by  the  cost  of  extensions  and  additions.  And  further,  that,  should  the  city  demand  municipal  owner- 
ship, the  owner  should  be  paid  the  property  value  plus  10  per  cent. 

In  a  measure,  these  principles  will  apply  to  the  coal  business,  but  we  must  add  annually,  a  royalty 
for  coal  depletion  and  a  depreciation  on  plant  and  equipment,  which  cannot  be  kept  intact,  because 
there  is  not  the  permanency  of  a  street  railroad,  and  also  an  amount  equal  to  6%  of  the  property  value 
for  the  hazard  of  mining. 

Our  laws  are  intended  to  prohibit  combinations  or  agreements  that  have  as  their  object  extortion 
from  the  buyer,  but  there  are  no  laws  to  prohibit  the  selling  of  a  commodity  at  less  than  cost,  nor  to 
prohibit  a  producer  from  demanding  for  his  product  its  full  cost  plus  a  reasonable  profit.  Our  law- 
makers must  have  assumed  that  every  prudent  business  man  would,  at  least,  demand  a  price  that  would 
pay  the  cost  of  operation,  interest  on  the  investment,  and  return  the  investment  with  a  profit,  and  that 
a  provision  that  no  extortion  occur  would  meet  all  requirements ;  but  there  are  those  who  cripple  their 
own  resources  by  selling  at  less  than  cost,  if  the  cost  be  properly  computed,  and  entail  a  loss  upon 
others  by  their  ill  advised  act.  The  laws  protect  the  consumer,  but  they  do  not  protect  the  producer 
against  the  folly  of  competitors. 

It  is  not  the  purpose  of  this'  effort  to  discuss  the  legal  phase  of  the  question  but  to  show  how  Coal 
Operators  may  determine  the  cost  of  producing  a  ton  of  coal  and  a  selling  price  that  will  give  them  a 
reasonable  profit  on  their  investment  and  assure  its   return. 

The  Coal  Operator,  especially  the  one  who  begins  an  operation  without  previous  experience  in  coal 
production,  in  the  course  of  time,  frequently  sees  his  margins  narrowing,  and  he  is  helpless  to  avert 
the  loss  which  must,  inevitably,  follow.  The  loss  thus  sustained  may  in  part  be  the  result  of  his  own 
improper  method  of  accounting,  or  it  may  be  wholly  the  result  of  the  improper  accounting  of  a  few 
of  his  immediate  competitors. 

The  coal  business,  by  the  very  nature  of  thingti,  carries  certain  hazards  not  present  in  other  lines 
of  business,  and  the  coal  investor,  for  this  reason,  is  entitled  to  a  greater  margin  of  profit  than  one 
engaged  in  a  less  hazardous  business,  but  there  are  few  operators  who  take  this  feature  into  account. 
These  hazards  may  be  enumerated  as  unexpectedly  meeting  with  faults,  gas,  water,  creep,  and  accidents. 


Coal  operators  generally,  no  matter  how  carefully  they  have  guarded  against  errors  in  cost 
accounting,  have  overlooked  one  fact,  which,  in  itself,  has  prevented  correct  determination  of  cost. 
When  the  operator  acquires  a  tract  of  coal  sufficient  for  a  substantial  operation  it  costs  him  a  definite 
amount  of  money,  and  he  also  closely  estimates  the  number  of  tons  of  coal  that  his  purchase  will  ulti- 
mately yield.  He  begins  to  operate  in  the  coal  located  nearest  his  openings  and,  as  the  coal  is  mined, 
he  must,  from  day  to  day,  go  farther  and  farther  into  the  seam,  until  he  reaches  the  end,  or  limit,  of 
his  holdings,  which  requires  longer  hauls  and  increased  cost  of  operation  and  maintenance.  It  requires 
double  the  amount  of  main  track,  double  the  amount  of  maintenance,  and  double  the  amount  of  power  to 
haul  coal  one  mile  as  is  required  to  haul  coal  one-half  mile,  and  the  cost  of  ventilation  increases  even 
more  rapidly.  Those  who  charge  as  a  part  of  their  cost  of  production,  a  royalty  for  coal  depletion, 
figure  from  the  standpoint  of  average  value  per  ton  in  the  ground,  but  they  have  overlooked  the  fact 
that  the  coal  nearest  their  operation,  and  first  mined,  has  the  greatest  value,  while  that  farthest  re- 
moved from  the  operation  has  the  least  value.  The  result  is  that  those  who  have  charged  a  flat  royalty 
as  a  part  of  their  cost  have  not  charged  a  proper  royalty.  To  obtain  a  more  uniform  cost,  the  roy- 
alty, when  the  recoverable  coal  is  sufficient  to  operate  for  25  years,  should  be  double  the  average  value, 
at  first,  and  gradually  reduced  to  nothing  by  the  time  the  length  of  haul  becomes  prohibitive.  Unless 
this  be  done  the  operator  exhausts  his  most  valuable  coal  and  sells  it  to  the  consumer  at  a  price  which 
will  not  cover  his  cost  of  mining  at  the  limit  of  his  territory.  In  other  words,  the  operator  who  does 
not  take  this  into  account  is  misled,  believing  that  he  is  making  money,  when,  as  a  matter  of  fact,  he  is 
not,  just  as  the  horsedealer  thinks  he  is  making  money  when  he  buys  ten  horses  at  $100  each,  ten  at 
$1.")0  each,  and  ten  at  $200  each  (his  average  value  being  $150  each),  and  sells  ten  of  his  best  horses 
at  $175  each.  He  might  figure  that  he  has  made  $25  on  each  horse  in  the  sale,  but,  as  a  matter  of  fact, 
he  has  lost  $25  on  each  horse  sold. 

Unmined  coal  in  the  earth  may  be  properly  considered  as  raw  material.  The  manufacturer,  who 
conducts  a  manufacturing  business,  procures  his  raw  material  from  time  to  time  from  various  parts  of 
the  country  in  such  quantities  as  he  demands  and,  when  the  cost  thereof  fluctuates,  he  is  enabled  to  make 
a  proportionate  charge  therefor,  into  the  cost  of  the  finished  product.  If  the  supply  runs  short  from 
one  source  he  obtains  it  from  another.  His  real  estate  and  buildings,  once  a  location  is  made,  assure 
him  permanency  of  location.  Such  real  estate  does  not  depreciate  in  value  and  his  depreciation  on 
buildings  is  minimized  by  their  assured  use  for  the  full  term  of  their  life.  The  Coal  Operator,  on  the 
other  hand,  has  to  meet  an  entirely  difi'erent  condition.  To  engage  in  the  coal  mining  business  the 
Operator  must  acquire,  outright,  by  purchase  or  lease,  title  to  an  acreage  of  coal  sufficient  to  warrant 
the  development  of  a  mine.  His  source  of  raw  material,  or  coal,  to  be  operated  at  that  mine,  is  wholly 
restricted  to  the  coal  accessible  to  such  operation  and,  by  reason  thereof,  his  investment  in  raw  material 
must  be  sufficient  to  operate  a  great  number  of  years  which,  at  once,  creates  a  heavy  carrying  charge. 
He  must  invest  in  real  estate  upon  which  to  locate  his  mine  and  pay  for  such  real  estate  a  price  much 
higher  than  the  average  value  of  farm  acreage  in  order  to  induce  the  owners  to  part  with  portions  of 
their  land.  When  his  coal  is  exhausted  and  his  mine  is  abandoned,  the  real  estate,  for  which  he  paid 
a  high  price,  has  depreciated  to  a  very  low  value.  Unless  he  acquires  sufficient  coal  accessible  to  his 
operation  to  assure  continuance  of  mining  during  a  period  equal  to  the  life  of  the  buildings  and 
equipment  which  he,  by  necessity,  must  provide,  these  have  a  correspondingly  shorter  period  of  utility 
and  a  correspondingly  greater  depreciation. 

Some  operators  disregard  the  item  of  depreciation,  giving  no  consideration  to  the  period  of  utility 
of  their  plant  and  equipment,  but  it  is  apparent  that,  with  a  quantity  of  coal  sufficient  to  operate  20 
years,  at  the  end  of  which  time  the  plant  must  be  abandoned,  the  minimum  depreciation  cannot  be  less 
than  5%  per  annum,  but,  if  the  quantity  of  coal  be  sufficient  to  operate  25  years,  the  minimum  depre- 
ciation would  be  but  4%  per  annum.  On  the  other  hand,  if  there  is  only  sufficient  coal  to  operate  10 
years,  the  minimum  depreciation  should  not  be  less  than  10%.  From  this,  it  will  be  seen  that  the  min- 
imum depreciation  is  influenced  directly  by  the  duration  of  the  operation.  Some  operators  even  neg- 
lect a  charge  for  royalty,  or  coal  depletion,  while  others  make  such  a  charge  determined  arbitrarily, 
without  any  definite  rule  for  arriving  at  the  proper  charge.  Some  operators  charge  interest  on  their 
investment  as  a  part  of  the  cost  of  production  while  others  simply  charge  actual  interest  paid  on  secur- 
ities. 


The  Coal  Operator,  who  disregards  interest  on  investment,  plant  depreciation,  and  coal  depletion, 
charging  as  cost  his  actual  outlay,  usually  deceives  himself.  When  he  adds  to  his  actual  cost  an  imag- 
inary profit  that  will  satisfy  him  and  sells  his  product  at  that  price,  he  not  only  deceives  himself,  but 
he  does  an  injustice  to  his  neighbors  by  establishing  a  price  for  a  product  which  will  not  cover  the  cost 
of  production,  if  properly  calculated,  and  he  brings  loss  to  himself  and  his  associates. 

Another  condition  that  misleads  most  coal  operators,  and  one  that  is  frequently  disregarded,  is  the 
changing  value  of  coal  property.  No  well  defined  rules  have  ever  been  established  for  determining  the 
value  of  a  coal  property  and  the  absence  of  such  rules  makes  correct  accounting  more  difficult.  Some 
operators,  when  the  results  of  operation  prove  unsatisfactory  avoid  showing  a  loss  by  arbitrarily 
showing  an  increase  in  the  value.  This  is  all  wrong.  The  value  of  a  property  is  just  what  it  is  in  com- 
parison with  other  like  properties,  no  more  and  no  less,  although  each  property  has  certain  physical 
conditions  which  must  be  considered  in  determining  its  value.  A  property  having  good  physical  con- 
ditions is  more  valuable  than  one  with  poor  physical  conditions,  because  the  cost  of  operation  at  the 
latter  must,  naturally,  be  greater,  which  reduces  the  value.  A  property  becomes  more  valuable  from 
a  permanent  increase  in  net  earnings,  when  the  increased  earnings  go  to  surplus,  or  profit  and,  to  this 
extent,  a  property  can  be  made  more  valuable,  but  one  cannot  arbitrarily  add  to  its  value.  If  one 
attempts  to  obscure  a  loss  by  arbitrarily  increasing  values  with  a  view  of  selling  the  property  and  the 
losses,  at  par,  he  will,  most  likely,  be  disappointed. 

Each  individual  property  may  have  a  different  value  per  ton,  as  compared  with  other  properties, 
but  the  average  selling  price  of  coal  of  similar  grade  in  any  one  district,  or  region,  largely  determines 
the  base  value  of  coal  acreage  in  that  district;  and  the  operator  who  does  not  give  consideration  to 
this  fact  and  sells  coal  at  a  price,  underbidding  his  competitors,  without  taking  into  account  the  cost, 
is  directly  responsible  for  depressing  coal  values  in  that  district  generally. 

Investors  are  more  frequently  securing  the  opinion  of  engineers  and  expert  accountants,  before 
investing,  and  the  methods  employed  by  them  in  determining  values  are  being  reduced  to  a  science.  The 
progressive  operator  is  more  frequently  employing  engineers  and  accountants  to  check  up  his  condi- 
tions and  values,  to  recommend  betterments,  and  to  show  the  proper  values  as  a  basis  for  proper 
accounting.  This  is  most  essential  and  should  be  the  first  step  toward  establishing  a  uniform  system  of 
computing  costs. 

We  frequently  hear  Coal  Operators  complain  of  fluctuations  and  lack  of  stability  in  the  coal  busi- 
ness. There  is  no  business  entirely  free  from  fluctuations  in  demand  for  the  product,  but  there  is  more 
lack  of  stability  in  the  coal  business,  than  in  any  other,  because  many  Coal  Operators  act  independ- 
ently, and,  in  various  other  ways,  tend  to  destroy,  rather  than  to  create,  the  co-operation  which  brings 
effective  results. 

The  successful  business  man  bases  his  selling  price  upon  his  cost  of  production,  allowing  a  fair 
margin  for  profit,  and  he  always  charges  as  a  part  of  his  cost  the  value  of  his  raw  material,  interest 
on  his  investment,  and  depreciation  on  his  plant. 

It  is  not  my  purpose  to  make  this  a  treatise  on  bookkeeping  but  to  indicate  to  the  operator  and  his 
bookkeeper  how  to  avoid  loss  through  errors  in  cost  accounting. 

There  is  no  other  commodity  so  essential  to  our  industrial  and  personal  welfare  as  coal,  but  we 
have  no  line  of  business  in  which  the  methods  of  cost  accounting  vary  so  greatly  as  in  the  coal  business. 

The  coal  business,  with  reference  to  cost  accounting,  is  very  different  from  any  other  line  of  busi- 
ness, and  the  methods  of  accounting  employed  in  other  lines  of  business,  when  applied  to  the  coal  busi- 
ness, greatly  mislead  the  Coal  Operator. 

When  a  coal  property  is  acquired,  the  logical  order  of  accounting  is  as  follows: 

A  company  is  incorporated  and  organized,  and  the  expense  is  a  proper  charge  to  property  account 
and  should  be  treated  as  an  asset. 

The  cost  of  coal  rights  and  necessary  surface  land  should  be  charged  to  property  account. 

The  cost  of  development  and  equipment,  including  engineering,  labor,  machinery,  material,  interest 
on  actual  investment  and  capital,  taxes,  insurance,  and  cost  of  administration  (until  the  mine  is  devel- 
oped to  the  degree  that  the  mine  produces  room,  or  wide,  coal  over  the  permanent  tipple),  less  income 
for  the  product  during  such  development,  should  be  charged  to  property  account  and  treated  as  an 
asset. 


The  mine  should  then  be  put  on  an  operating  basis,  and  the  cost  of  operation  should  consist  of 
labor  and  supplies  in  connection  with  operation  and  maintenance,  interest  on  investment  and  capital,  a 
charge  for  risk  of  the  industry  equal  to  the  interest  charge,  a  charge  for  coal  depletion,  a  charge  for 
plant  depreciation,  and  the  cost  of  administration  and  general  expense. 

No  mention  need  be  made  of  the  usual  accounts  of  Property  and  Plant,  Cash,  Bills  Receivable,  Ac- 
counts Receivable,  Inventory,  Stock  Subscription,  Bonds,  Bills  Payable,  Accounts  Payable,  Dividends, 
Capital  Stock,  and  Profit  and  Loss,  as  these  accounts  should  be  entirely  understood  by  the  bookkeeper. 

Some  operators  purchase  a  large  tract  of  coal  land,  only  a  part  of  which  can  be  operated  from 
any  one  operation.  Only  the  cost  of  that  part  of  the  coal  rights  which  will  be  mined  by  such  single 
operation  should  be  taken  into  the  operating  account,  and  the  rights  requiring  an  additional  operation 
should  be  carried  as  a  separate  investment,  apart  from  the  operating  accounts;  and  such  separate 
investment  should  be  carried  in  an  account  termed  "Inoperative  Coal  Rights"  which  should  be  charged 
with  the  cost  of  such  rights,  interest  on  the  cost,  taxes,  and  the  cost  of  administration,  until  the  invest- 
ment becomes  operative. 

Dwellings  and  stores  should  be  carried  in  a  separate  account,  apart  from  the  coal  operation,  as 
the  investment  has  an  income  of  its  own  and,  therefore,  should  be  accounted  for  separately.  The  cost 
of  dwellings  and  store  should  be  charged  to  "Dwellings  and  Store"  account  which  should  be  credited 
with  depreciation.  The  interest,  taxes,  insurance,  and  cost  of  maintenance  of  dwellings  and  store  should 
be  charged  to  "Dwellings  and  Store  Expense"  account  which  should  be  credited  with  rentals. 

Investment  in  physical  property  and  operating  costs  should  be  subdivided  into  the  following 
accounts 

PHYSICAL  PROPERTY: 

Real  Estate,  Mining  Rights,  Surveys  and  Maps,  General  Office,  Organization,  Financing,  Rail- 
road, Openings  and  Hoists,  Tipple  Equipment,  Power  Plant,  Shop  and  Equipment,  Ventilating  Equip- 
ment, Mine  Office,  Storehouse,  Stable  and  Live  Stock,  Mine  Tracks,  Electric  Wiring,  Lighting  Equip- 
ment, Mine  Locomotives,  Mining  Machines,  Mine  Cars,  Wagons  and  Tools,  Telephone  Equipment, 
Safety  Appliances,  Lubricating  Equipment,  Steel  Roof  Supports,  Mine  Pumps  and  Pipe,  and  Stone 
and  Dirt  Equipment. 

OPERATING  ACCOUNTS 

Mining,  Narrow  Work,  Faults,  Hauling,  Superintending,  Surveying,  Railroad  Expense,  Opening 
and  Hoist  Expense,  Tipple  Expense,  Power  Expense,  Shop  Expense,  Ventilating  Expense,  Mine  Office 
Expense,  Storehouse  Expense,  Stable  Expense,  Mine  Track  Expense,  Electric  Wiring  Expense,  Light- 
ing Expense,  Mine  Locomotive  Expense,  Mining  Machine  Expense,  Mine  Car  Expense,  Wagon  and  Tool 
Expense,  Telephone  Expense,  Safety  Expense,  Lubricating  Expense,  Timbering  Expense,  Drainage  Ex- 
pense, and  Stone  and  Dirt  Expense. 

The  operator  will  find  it  an  advantage  to  thus  subdivide  Property  Account  and  to  carry  the  above 
subdivisions  for  operating  costs,  as  it  will  enable  him  to  charge  his  investment  in  such  a  manner  as  to 
facilitate  the  computing  of  depreciation,  and  arrive  at  the  actual  cost  of  operation  for  each  division. 

General  Expense  should  be  subdivided  into  the  following  accounts: 

Salaries  of  Officers,  Salaries  of  Salesmen,  Salaries  of  Clerks,  Traveling  Expense,  General  Office 
Expense,  Telephone  and  Telegraph,  Legal  Expense,  Taxes,  Insurance,  Interest  and  Discount,  Personal 
Injury,  Plant  Depreciation,  Investment  and  Capital  Interest,  Coal  Depletion,  and  Risk  of  Industry. 

Personal  Injury  should  be  charged  with  Liability  Insurance,  or,  in  the  event  such  insurance  is  not 
carried,  an  amount  equal  to  the  cost  of  same,  at  customary  rates. 

Plant  Depreciation,  and  Coal  Depletion  charges  are  the  most  difficult  of  determination,  but,  to  those 
operators  who  desire  to  avoid  loss  from  neglect  to  compute  plant  depreciation  and  coal  depletion,  as 
a  part  of  their  cost,  the  accompanying  schedule  of  plant  depreciation  and  example  indicating  method 
of  computing  coal  depletion  will  serve  their  purpose,   the   rates   for  depreciation  as   shown  being  based 


upon  ordinary  use  of  plant  and  equipment  for  natural  life.  When  the  probable  life  of  the  operation 
is  less  than  the  natural  life  of  the  property  receiving  consideration,  the  rate  must  be  computed  on  the 
term  basis  and  increased  proportionately. 

In  order  to  make  the  application  of  the  schedule  clear,  I  have  shown  under  remarks  opposite  each 
subdivision  of  property,  A,  B,  C,  D,  or  E,  as  reference,  to  facilitate  finding  the  term  in  years. 

When  the  rate  of  depreciation  is  not  given,  or  when  the  probable  life  of  the  operation  is  insufficient 
to  return  the  remainder  of  the  value,  at  the  rate  given,  the  depreciation  rate,  for  terms  A  and  D,  should 
be  determined  by  dividing  100  by  the  term  in  years,  which  in  turn,  may  be  determined  by  dividing  the 
whole  number  of  recoverable  tons  of  coal  by  200  times  the  average  daily  production. 

The  rate  of  royalty,  term  B,  for  fee  coal,  when  sufficient  to  operate  25  years,  may  be  determined, 
for  the  first  year,  by  dividing  twice  the  coal  value  by  the  whole  number  of  recoverable  tons,  which  rate 
should  be  gradually  reduced  each  year,  proportionately,  as  shown  by  the  example  previously  re- 
ferred to. 

The  royalty  charge,  term  C,  for  leased  coal,  may  be  determined  by  valuing  the  coal  as  if  owned  in 
fee,  regardless  of  the  rate  per  ton  provided  by  the  lease  and  arrive  at  the  rate,  for  the  first  year,  as 
in  the  case  of  B.     The  rate  for  the  first  year  should  be  reduced  each  year  the  same  as  with  fee  coal. 

The  rate  for  depreciating  the  cost  of  Financing  may  be  found  by  dividing  100  by  the  number  of 
years  the  securities  run,  from  date  of  issue  to  date  of  retirement. 

By  reference  to  the  example  before  mentioned,  it  will  be  seen  that,  during  the  first  year,  dating 
from  the  time  that  development  is  begun,  there  is  no  depletion  charge,  because  the  mine  is  being  devel- 
oped and  the  cost  of  production  is  necessarily  high.  It  will  also  be  noticed  that  the  depletion  amounting 
to  $48,000,  or  12  cents  per  ton  on  400,000  tons,  for  the  second  period  is  reduced  to  $46,000,  or  11.5 
cents,  for  the  third  year,  or  period,  during  which  400,000  tons  are  produced  (which  is  the  proper 
term  to  use  rather  than  the  year),  with  a  like  reduction  for  each  successive  period.  This  reduction 
of  one  half  cent  per  ton,  to  be  made  after  each  400,000  tons  be  produced,  will,  in  part,  compensate  for 
the  increased  cost  of  haul  and  maintenance  due  to  mining  the  400,000  tons  of  nearest  coal. 

By  assuming  that  one  half  cent  properly  compensates,  so  far  as  coal  depletion  charge  should  con- 
tribute, for  increased  haul  and  maintenance  and  that  only  4,000,000  tons  of  recoverable  coal  be  acces- 
sible, it  is  evident  that,  with  the  same  capacity,  the  mine  will  be  exhausted  in  eleven  periods,  including 
the  one  year  allowed  for  development,  400,000  tons  being  mined  in  each  of  the  last  ten.  In  this 
instance,  it  will  be  noticed  that  the  coal  depletion,  calculated  as  before,  would  amount  to  $390,000, 
which  gives  the  4,000,000  tons  an  average  value  of  9.75  cents  per  ton. 

It  is  now  apparent  that  an  operation  having  10,000,000  tons  recoverable  coal,  which  cannot  earn 
sufficient  to  cover  a  royalty  charge  of  more  than  6  cents,  for  the  first  operating  period,  ceases  to  have 
value  after  the  twelfth  operating  period,  and  operation  after  that  period  has  passed  must  be  at  a  loss, 
unless  the  operator  increases  the  earnings.  The  coal  depletion  will  have  amounted  to  but  $156,000  which 
at  once  gives  the  coal  a  value  of  but  1.56  cents  per  ton  for  the  total  available  coal,  or  3.25  cents  per 
ton  on  4,800,000  tons  minable  coal. 

It  is  impossible  to  illustrate  every  condition,  but  the  conditions  cited  will  make  clear  the  fact  that 
the  value  of  the  coal,  regardless  of  what  may  be  paid  for  it,  is  determined  by  the  net  earnings,  out  of  which 
must  be  paid  plant  depreciation,  royalty,  investment  and  capital  interest,  risk  of  industry  and  a  reason- 
able profit. 

Out  of  "Investment  and  Capital  Interest"  charge  should  be  paid  the  interest  on  borrowed  capital 
and,  out  of  coal  depletion  and  plant  depreciation  charges,  replacement  expenditures  should  be  paid. 

The  charge  for  risk  of  the  industry  should  be  treated  as  a  fund  out  of  which  should  be  paid 
expense  incurred  as  a  result  of  encountering  the  unexpected  conditions  enumerated,  including  personal 
injury  expense  not  covered  by  liability  insurance. 

It  is  to  be  understood  that  all  cost  of  original  and  additional  property,  and  the  replacement  of 
equipment,  should  be  charged  to  property,  and  that  labor,  supplies,  and  expense  in  connection  with  oper- 
ation and  maintenance  are  to  be  charged  to  operating.  Plant  Depreciation  and  Coal  Depletion  charged 
to  those  accounts  should  be  credited  to  property. 


Income  should  be  subdivided  into  the  following  accounts: 

Coal  Sales,  and  "Receipts  from  other  Sources." 

Material  and  Supplies  placed  in  the  storehouse  as  a  reserve  for  emergency  or  future  use  should  be 
charged  to  "Material  and  Supply"  Account,  which  should  be  credited  as  the  material  and  supplies 
are  used  and  charged  to  the  proper  Property  or  Operating  accounts,  from  the  storekeeper's  report. 

Powder,  Miner's  Oil,  and  Miner's  Supplies  should  be  charged  to  "Miner's  Supply"  Account, 
which  should  be  credited  with  the  income  from  same. 

The  storekeeper's  services  should  be  charged  to  Storehouse  Expense  and  Miners'  Supply  in  the 
proper  proportions. 

Freight  and  Express  charges  and  cartage,  or  teaming,  should  be  charged  to  the  same  accounts 
as  material  in  connection  with  which  these  charges  originated,  and,  when  the  material  is  placed  in  the 
storehouse  and  charged  to  "Material  and  Supply,"  the  charge,  and  credit  upon  use  of  the  material, 
must  include  Freight,  Express,  and  Cartage. 

Cost  accounting  should  not  only  enable  the  operator  to  accurately  determine  the  cost  of  conducting 
his  business,  but  it  should  be  accomplished  in  such  a  way  as  to  facilitate  comparison,  which  is  prac- 
tically impossible  except  as  between  results  arrived  at  by  uniform  methods. 

The  accompanying  charts  illustrate  the  difference  between  the  methods  commonly  employed  by 
operators  and  the  one  herein  provided. 

These  charts  have  been  made  on  the  assumption  that  a  new  operation  has  a  capacity  of  2,000  tons 
per  day,  that  there  is  sufficient  coal,  with  the  most  favorable  conditions,  accessible  to  the  operation 
to  operate  the  mine  200  days  per  year  for  a  period  of  25  years,  that  there  are  10,000,000  tons  of  coal 
in  the  ground  having  a  value  of  6c  per  ton,  or  $600,000,  that  the  investment  in  the  plant,  exclusive 
of  dwellings  and  store,  is  $200,000,  that  the  depreciation  at  proper  rates  will  amount  to  4c  per  ton 
on  400,000  tons  annual  production,  or  $16,000,  at  the  beginning,  or  an  average  of  8%,  that  the  inter- 
est in  the  beginning  will  amount  to  $48,000,  equal  to  12  cents  per  ton,  or  6%  on  $800,000,  that  the 
coal  depletion  charge  of  12  cents  per  ton  would  obtain  at  first  and,  that  a  charge  equal  to  the  interest 
should  be  made  to  cover  the  risk  of  the  industry,  because  this  risk  cannot  be  conservately  estimated  at 
less  than  the  interest  on  the  investment. 

Chart  A  is  designed  to  show  how  operators  commonly  compute  their  cost.  It  is  assumed  that,  at 
the  beginning,  the  labor  cost  is  60,  and  supplies  and  other  expense  10,  interest  on  borrowed  capital, 
amounting  to  $266,667  (which  does  not  include  owner's  investment)  4,  uniform  royalty  6,  all  of  which 
total  80. 

The  operator  may  consider  that  if  he  can  sell  coal  at  90  cents  he  is  making  all  his  cost,  including 
interest  and  royalty,  and  an  imaginary  profit  of  10  cents,  but  he  has  made  no  charge  for  plant  depre- 
ciation, no  charge  for  interest  on  his  own  investment,  and  has  given  no  consideration  to  risk  of  the 
industry. 

As  the  workings  advance  and  the  mine  becomes  older,  the  cost  for  labor  increases  from  60  to  80, 
supplies  and  other  expense  from  10  to  20,  and  the  interest  on  borrowed  money  increases  from  4  to 
10,  because  the  operator  has  not  charged  sufficient  for  his  coal  to  enable  him  to  pay  his  cost,  and  he 
has  increased  his  loans.  It  will  be  seen  that,  at  a  90  cent  selling  price,  after  the  mine  has  operated  7 
years,  the  imaginary  profit  is  entirely  wiped  out,  and  the  operator  is  not  able  to  make  his  uniform 
royalty.  At  the  end  of  11  years  he  is  not  able  to  charge  a  royalty  and  is  not  able  to  pay  the  full 
amount  of  interest.     At  the  end  of  25  years  he  has  no  profit  at  a  selling  price  under  $1.16. 

The  operator  who  figures  his  cost  by  this  method  deceives  himself.  If  he  sells  his  coal  at  98 
cents  per  ton,  he  will  apparently  make  a  profit  of  18  cents  at  the  beginning,  which  gradually  reduces 
year  by  year  for  12y2  years,  when  apparent  profit  ceases,  and  he  runs  into  a  loss,  which  gradually 
increases,  until  at  the  end  of  the  25  year  period,  if  he  still  sells  coal  at  98  cents  per  ton,  his  loss  is 
18  cents  per  ton,  or  equal  to  his  apparent  profit  at  the  beginning.  He  has  not  returned  any  part  of 
his  investment  except  what  royalty  he  received  in  the  earlier  period  of  the  operation. 

Chart  B  is  designed  to  show  how  the  operator  should  compute  his  cost  to  safeguard  his  investment. 
Labor,  supplies,  and  other  expenses  increase  as  before.  He  should  charge  plant  depreciation,  which 
by  the  nature  of  things,  is  less  per  ton  in  the  beginning  and  gradually  increases  throughout  the  period 


as  he  is  required  to  add  additional  equipment  and  take  care  of  the  increased  hauls  and  ventilation. 
It  is  assumed  that  depreciation  increases  from  4,  at  the  beginning,  to  8,  at  the  end. 

Interest  should  be  charged  on  the  full  property  value,  which  is  12  at  first,  gradually  reducing  to  2 
at  the  end,  as  the  investment  is  returned  through  royalty  and  plant  depreciation  charges.  Royalty,  or 
coal  depletion,  should  be  double  the  average  value  of  the  coal,  gradually  reducing  throughout  the 
period,  from  12  at  the  beginning,  to  nothing  at  the  end.  There  are  certain  risks,  which  cannot  be  esti- 
mated at  less  than  the  interest  on  the  unretired  investment,  being  greatest  in  the  beginning,  because 
the  investment  is  largest.     This,  also,  should  be  reduced  gradually  to  nothing,  at  the  end  of  the  period. 

It  will  be  seen  that  the  real  cost  of  producing  a  ton  of  coal,  under  conditions  previously  men- 
tioned, is  $1.10  at  the  beginning  and  throughout  the  period,  except  as  such  cost  may  be  influenced  by 
increase  or  decrease  of  labor  scale.  From  this  it  is  apparent  that  no  real  profit  is  made  except  by 
realizing  a  selling  price  in  excess  of  $1.10  per  ton. 

It  is  also  apparent  that,  if  the  average  value  of  this  coal  is  6c  per  ton  and  the  operator  desires 
to  make  a  net  profit  throughout  the  period  of  operation,  equal  to  $24,000,  or  3%  on  his  original  invest- 
ment of  $800,000,  over  and  above  the  cost  which  is  $1.10  per  ton,  he  must  not  sell  the  product  for  less 
than  $1.16  per  ton. 

The  selling  price  of  $1.16  happens  to  equal,  exactly,  the  cost  at  the  end  of  the  operation,  as  shown 
by  Chart  A.  If  the  operator,  who  has  been  computing  his  cost  as  shown  by  Chart  A,  will  draw  a 
horizontal  line  on  a  scale  of  116  and  another  line  on  a  scale  representing  the  price  at  which  he  has 
been  selling  coal,  he  will,  at  once,  see  how  much  he  has  been  losing  by  his  method  of  accounting. 

Operators  are  frequently  confused  when  considering  costs,  one  claiming  that  the  actual  outlay  for 
labor  and  supplies  constitutes  the  operating  cost,  the  actual  outlay  for  salaries,  legal,  general  office, 
and  traveling  expense,  taxes,  insurance,  and  personal  injury  constitutes  General  Expense,  and  interest 
on  borrowed  capital  together  with  sinking  fund  requirements  constitutes  overhead,  while  another  treats 
these  various  items  of  expense  in  various  and  different  ways  so  that,  when  an  operator  says  his  oper- 
ating cost  is  70  cents,  another  operator  does  not  understand  just  what  he  means,  because  the  latter 
uses  a  different  method  of  computation.  ^ 

It  would  be  simpler  and  more  easily  understood  to  consider  the  actual  cost  of  operation,  including 
repairs  (not  renewals  or  replacements),  salaries,  legal,  general  office,  and  traveling  expense,  taxes, 
insurance,  and  personal  injury  as  Constituting  Primary  Cost,  and  plant  depreciation,  coal  depletion, 
investment  and  capital  interest,  risk  of  industry,  and  a  reasonable  profit  as  Secondary  Cost. 

It  is  now  apparent  that,  at  the  beginning  of  an  operation  fully  developed,  in  order  that  the  coal  in 
the  ground  should  be  worth  6  cents  per  ton,  there  must  be  a  margin  between  the  Primary  Cost  and 
the  Selling  Price  of  46  cents  per  ton,  divided  as  follows :  Plant  Depreciation  4,  Interest  on  Investment 
12,  Coal  Depletion  12,  Risk  of  Industry  12,  Net  Profit  6.  If  this  margin  be  narrowed  by  reduction 
of  the  selling  price,  or  by  increase  of  the  Primary  Cost,  the  inevitable  result  is  that  the  coal  value  is 
lessened,  while  an  increase  in  the  selling  price,  or  a  reduction  of  the  Primary  Cost,  increases  the  coal 
value. 

The  accompanying  Table  of  Comparisons  will  better  illustrate  the  effect  on  coal  value  by  narrow- 
ing of  margins,  either  by  increased  Primary  Cost,  or  by  reduced  Selling  Price. 

An  inspection  of  this  table  will  make  clear  to  the  operator  who  claims  that  his  coal  has  a  value 
of  6  cents,  when  his  Primary  Cost  is  73  and  his  Selling  Price  is  96,  that  his  margin  is  only  23  cents 
and,  as  a  result,  his  coal  value  is  but  2  cents.  If  the  operator,  whose  Primary  Cost  is  73  and  Selling 
Price  96,  paid  6  cents  for  his  coal  and  says  he  considers  a  charge  of  12  cents  for  risk  of  the  industry 
and  a  charge  of  6  cents  for  profit  unreasonable,  let  him  deduct  18  cents  from  the  proper  Selling  Price 
of  116  and  the  remainder  will  be  98.  He  will  then  see  that,  with  a  Primary  Cost  of  73  and  a  Selling 
Price  of  96,  or  a  margin  of  23  (when  his  Primary  Cost  should  be  but  70  and  his  Selling  Price  98,  or 
a  margin  of  28),  he  has  suffered  a  direct  loss  of  5  cents  per  ton;  and,  sooner  or  later,  he  will  meet  with 
circumstances  which  will  convince  him  that  a  charge  for  risk  of  the  industry  is  justifiable  and  advisable 
at  all  times,  whether  or  not  the  circumstances  demand  it  at  that  particular  time.  He  will  also  soon  come 
to  see  the  necessity  for  averting  loss  and  to  desire  a  reasonable  profit  on  his  investment,  to  accomplish 
which  he  must  increase  the  margin  23  cents. 


If  an  operator  should  be  fortunate  enough  to  escape  all  the  risks  usually  present  in  the  coal  indus- 
try and  the  charge  for  risk  be  transferred  to  profit,  he  would  simply  have  his  profit  increased  to  9% 
on  the  unretired  investment,  which  could  not  be  considered  excessive;  and  but  few  operators  could  ever 
hope  to  realize  it.  Then,  when  3%  profit  be  counted  in  the  cost,  it  is  possible  for  the  profit  to  range 
from  87c  to  9%. 

It  is  apparent  that,  if  the  coal  has  a  value  of  6  cents,  when  the  Primary  Cost  is  74  cents,  the  Sell- 
ing Price  must  be  120  cents  to  give  the  necessary  margin  of  46  cents. 

In  compiling  this  table  it  has  been  assumed  that  as  the  Primary  Cost  lessens,  because  of  good 
physical  conditions,  the  value  increases.  Interest  and  Coal  Depletion  charges  likewise  increase,  and 
profit  and  risk  charges  should  also  be  increased  proportionately  because  of  the  larger  investment.  It 
may  at  first  appear  that  the  charge  for  risk  is  increased  too  rapidly,  but  the  higher  priced  coals  come 
from  gas  producing  mines,  and  the  rate  is  not  excessive. 

The  comparison  of  Selling  Prices  and  other  factors  based  on  an  operation  having  10,000,000  tons 
minable  coal,  as  shown  in  the  upper  section  of  table  does  not  provide  for  operations  of  less  available 
tonnage.  The  lower  section  of  the  table  is  designed  to  show  a  comparison  for  the  three  conditions 
covered  by  the  example  Indicating  Method  of  Computing  Coal  Depletion. 

The  25  period  operation  at  a  Selling  Price  of  116  is  taken  as  a  basis,  has  the  lowest  plant  depre- 
ciation and  gives  a  profit  of  6  cents  per  ton. 

The  10  period  operation  is  charged  with  the  same  coal  depletion  because,  conditions  being  uniform, 
the  4,000,000  tons  are  just  as  valuable  as  the  first  4,000,000  tons  of  the  larger  acreage  (which  gives  an 
average  coal  value  of  9.75  cents),  but  the  plant  depreciation  is  increased  because  of  the  shorter  life, 
and  the  charges  for  risk,  interest,  and  profit  are  less  because  the  investment  is  smaller,  but  because  of 
the  shorter  life  the  operator  must  suffer  loss  from  high  rate  of  depreciation  of  Dwellings  and  Store, 
accounted  for  separately,  and  we  must  add  to  profit  4  cents  to  compensate  for  this. 

The  4,800,000  tons  mined  from  10,000,000  tons  available  coal,  as  shown  in  third  column,  when 
conditions  are  such  that  the  Primary  Cost  is  86  cents,  makes  operation  after  the  twelfth  period  un- 
profitable, and  plant  depreciation  is  charged  accordingly.  With  a  6  cent  royalty,  at  first,  and  other 
proper  charges,  including  an  addition  of  3  cents  to  cover  high  rate  on  Dwellings  and  Store,  because  of 
short  life,  the  proper  selling  price  is  116,  and  the  coal  value  is  3.25  cents  on  but  4,800,000  tons.  The 
operator  who  buys  10,000,000  tons  of  coal  having  physical  conditions  that  create  a  Primary  Cost  of 
86  cents,  when  the  Selling  Price  is  116,  can  only  mine  4,800,000  tons  until  he  begins  to  sustain  a  loss 
of  profit  and,  if  operation  be  continued  without  an  increase  in  selling  price,  he  will  soon  sustain  an 
actual  loss,  even  if  the  coal  only  costs  1.56  cents. 

If  an  operator  buys  10,000,000  tons  of  coal  at  1.56,  obtains  a  Primary  Cost  of  70  and  sells  the 
product  at  100  he  will  begin  to  lose  his  profit  after  mining  4,800,000  tons,  on  which  he  began  charg- 
ing a  royalty  of  6  cents,  and  he  has  made  6,200,000  tons  of,  otherwise  valuable,  coal  worthless  because 
of  selling  at  too  low  prices. 

A  careful  study  of  the  causes  and  effects  should  convince  every  one  that  operators  producing  sim- 
ilar grades  of  coal  must  all  receive  about  the  same  price  for  the  product ;  that  variation,  of  any  degree, 
in  price  may  obtain  as  between  various  districts  producing  varying  grades,  but  not  between  operators 
of  a  district  producing  a  uniform  grade  without  the  low  priced  operator  directly  depressing  his  own 
values  and  indirectly  the  values  of  his  competitors. 

From  these  factors,  the  operator  can  have  his  property,  whether  a  new  or  an  old  one,  valued  by 
a  competent  engineer  and  determine  the  proper  factors  as  a  basis  of  calculating  costs.. 

Chart  C  is  designed  to  show,  by  means  of  an  irregular  curve,  the  relation  between  output  and  cost. 

Assuming  200  days  operation  to  represent  100%  working  time,  and  that  75c  per  ton  covers  the 
primary  cost,  it  is  apparent  that,  when  the  total  cost  is  $1.10,  the  secondary  cost  is  35  cents  per  ton. 

Three  curves  are  shown  as  1,  2,  and  3.  Curve  1  is  designed  to  show  increase  of  cost  due  to  reduc- 
tion of  working  time  when  coal  depletion  and  risk  of  industry  is  charged  by  the  ton.  It  will  be 
observed  that  when  the  working  time  is  reduced  to  25%  of  200  days  the  cost,  as  shown  by  curve  1, 
is  $1.42,  while  at  50%  working  time  the  cost  is  $1.21.  In  other  words,  when  the  operation  reduces  the 
working  time  from  200  days  to  100  days  per  year  the  cost  increases  11  cents  per  ton. 


Curve  2  is  designed  to  show  the  increase  in  cost  due  to  reduction  of  working  time,  when  the  coal 
depletion  charge  is  considered  as  a  fixed  amount,  as  in  a  case  where  bonds,  or  preferred  stock,  is  issued 
under  terms  requiring  a  minimum  payment  per  year.  It  will  be  seen  that,  when  the  coal  depletion  charge 
is  thus  fixed  and  the  working  time  is  but  100  days,  the  cost  increases  from  $1.10  to  $1.33. 
Curve  3  shows  how  the  cost  increases  due  to  reduction  of  working  time,  when  the  risk  of  industry  is 
treated  as  a  fixed  charge  and  the  working  time  is  but  100  days,  in  which  instance  the  cost  increases 
from  $1.10  to  $1.46. 

In  the  coal  mining  business  the  maximum  working  time  cannot  be  estimated  at  more  than  800  days 
and,  in  general  practice,  the  average  working  time  of  mines  is  about  200  days.  This  chart,  which 
shows  costs  of  $1.21,  $1.33,  and  $1.45,  for  the  conditions  represented  by  curves  1,  2,  and  8,  with  50% 
working  time,  represents  practically  one-third  the  maximum  possible  working  time. 

Some  operators,  during  certain  periods,  are  fortunate  enough  to  operate  200  days  or  more  per 
year,  while  others  are  unfortunate  enough  not  to  be  able  to  work  nearly  so  much  time.  This  uncer- 
tainty, in  many  cases,  influences  the  operator  to  sell  his  product  at  less  than  cost  and  suffer  loss,  because 
he  estimates  that,  by  keeping  his  mine  working,  he  avoids  a  greater  loss  due  to  increased  cost  per  ton 
of  maintenance  and  overhead,  which  would  result  from  a  reduction  in  working  time. 

The  operator  who  tries  to  guard  against  loss  by  even  temporarily  selling  his  product  at  less  than 
cost  with  a  view  of  minimizing  loss  from  increased  maintenance  and  overhead,  simply  parts  with  a  por- 
tion of  his  assets  without  compensation. 

The  operator,  with  a  new  operation  and  low  Primary  Cost,  may  think  competition  with  the  opera- 
tor having  an  older  mine  an  easy  problem,  but  he  overlooks  the  coming  of  another  new  mine  at  a  time 
when  his  mine  becomes  one  of  the  older  ones. 

Again,  the  operator  may  contemplate  a  general  advance,  or  enhancement,  in  the  value  of  coal 
property,  because  of  enormous  production  and  consequent  reduction  of  reserves,  but  this  is  more  especially 
true  of  certain  regions,  while  values  in  other  regions  remain  stationary,  or  even  decline,  and  enhance- 
ment is  not  to  be  depended  upon,  especially  if  the  operator  depresses  the  value  by  establishing  a  price 
at  less  than  cost. 

Nothing  but  a  realization  of  the  potent  fact  that  the  operator,  to  be  successful,  must  earn  suffi- 
cient during  the  earlier  years  of  his  operation,  when  his  Primary  Cost  is  least,  to  amortise  a  large 
part  of  his  investment  and  reduce  his  interest  charge,  will  save  him  from  ultimate  loss  of,  at  least, 
some  of  his  means. 

The  only  safe  course  is  to  sell  only  at  a  price  that  will  cover  both  primary  and  secondary  costs 
with  a  reasonable  profit  included  in  the  secondary  cost. 

By  this  method  of  accounting  the  operator  charges  all  his  cost  and  his  profit  into  the  cost  of  pro- 
ducing a  ton  of  coal  and  he  is  not  misled  as  by  the  varying  and  incorrect  methods  of  cost  accounting 
generally  in  use. 

In  conclusion,  the  writer  would,  no  doubt,  be  considered  optimistic  to  express  the  hope  that  Coal 
Operators  generally  will  act  upon  the  suggestions  herein  made,  but  to  those  who  may  find  within  these 
pages  some  helpful  information  let  this  work  be  dedicated. 


Example  Indicating  Method  of  Computing  Coal  Depletion 


(Based  on  operation  until  haul  becomes  prohibitive) 


1 

is  6c 
0   tons 

when 
lufficient 

alty 

•sl 

2  »g 

°g^ 

1 

l-|2g 

•h     . 

1  .' 

.2  B 

■8 

•s 

0. 

1  « 

=1 

z  i 

.2  "  § 

p,  O 

If 

0.  g  ft-° 

Ifl 

S  §  >; 

<q£ 

11 
II 

1 

Development 

2 

400,000 

12. 

$48,000 

1> 

6. 

$24,000 

u 
"5 

3 

400,000 

11.5 

46,000 

5.5 

22,000 

05 

4. 

400,000 

11 

44,000 

9 

'a 

> 

5. 

20,000 

> 

5 

400,000 

10.5 

42,000 

CO 

g 

4.5 

18,000 

e 

6 

400,000 

10. 

40,000 

o 
o 

4. 

16,000 

o 
o 

7 

400,000 

9.5 

38,000 

o 

o 
o 

3.5 

14,000 

o 
o 

o 

8 

400,000 

9. 

36,000 

o 

3. 

12,000 

9 

400,000 

8.5 

34,000 

2.5 

10,000 

10 

400,000 

8. 

32,000 

2. 

8,000 

11 

400,000 

7.5 

30,000 

$390,000 

1.5 
1. 

6,000 
4,000 

12 

400,000 

7. 

28,000 

13 

400,000 
400,000 

6.5 
6. 

26,000 
24,000 

.5 

2,000 

$156,000 

14 

15 

400,000 

5.5 

22,000 

c  .S 

'"   a 

16 

400,000 

5. 

20,000 

0)  S 
cS  be 

CJ 

17 

400,000 

4.5 

18,000 

O   0) 

C  o 

18 

400,000 

4. 

16,000 

si    m 
>    3 

o  13 

19 

400,000 

3.5 

14,000 

i  s 

CO   « 

20 

400,000 

3. 

12,000 

5^ 

1  o 

o  o 

o  o 
o  o 

21 

400,000 

2.5 

10,000 

o  o 

0)   >* 

o  o 

22 

400,000 

2. 

8,000 

o  2 

"1  ^ 

S  -a 

o  o 

<N  O 

23 

400,000 

1.5 

6,000 

r^ 

24 

400,000 

1. 

4,000 

Si 

25 

400,000 

.5 

2,000 

CJ 

26 

400,000 

$600,000 

$156,000 

Table  of  Comparisons 


(Based  on  10,000.000  tons  available  and  minable  coal.      Factors  given  in  cents  per  net  ton.) 


Selling  Price 

Reasonable 
Profit 

Risk  of 
Industry 

Coal 
Depletion 

Investment 

and  Capital 

Interest 

Plant 
Depreciation 

Primary 
Cost 

Secondary 
Cost 

Coal 
Value 

86 

1.50 

3.00 

0 

3.00 

4 

74.50 

11.50 

0 

91 

2.25 

4.50 

2 

4.50 

4 

73.75 

17.25 

1 

96 

3.00 

6.00 

4 

6.00 

4 

73.00 

23.00 

2 

101 

3.75 

7.50 

6 

7.50 

4 

72.25 

28.75 

3 

106 

4.50 

9.00 

8 

9.00 

4 

71.50 

34.50 

4 

111 

5.25 

10.50 

10 

10.50 

4 

70.75 

40.25 

5 

116 

6.00 

12.00 

12 

12.00 

4 

70.00 

46.00 

6 

121 

6.75 

13.50 

14 

13.50 

4 

69.25 

51.75 

7 

126 

7.50 

15.00 

16 

15.00 

4 

68.50 

57.50 

8 

131 

8.25 

16.50 

18 

16.50 

4 

67.75 

63.25 

9 

136 

9.00 

18.00 

20 

18.00 

4 

67.00 

69.00 

10 

146 

10.50 

21.00 

24 

21.00 

4 

65.50 

80.50 

12 

156 

12.00 

24.00 

28 

24.00 

4 

64.00 

92.00 

14 

166 

13.50 

27.00 

32 

27.00 

4 

62.50 

103.50 

16 

176 

15.00 

30.00 

36 

30.00 

4 

61.00 

115.00 

18 

186 

16.50 

33.00 

40 

33.00 

4 

59.50 

126.50 

20 

Comparison  as  Covered  by  Example  Indicating  Method  of  Computing  Coal 

Depletion 


10,000,000 
Tons,  25  Per. 


4,000,000 
Tons,  10  Per. 


4,800,000 
Tons,  12  Per. 


10.000,000 
Tons,  12  Per. 


Primary  Cost  

Plant  Depreciation 

Risk  o£  Industry' 

Coal  Depletion  

Investment  Interest  

3%  Profit  

Added  for  short  life  and  high  depreciation  of  dwell 

ings  and  store 

Selling  price  


70 
4 
12 
12 
12 
6 

0 
116. 


70.00 
7.875 
8.85 

12.00 
8.85 
4.425 

4.00 
116. 


86.00 
7.65 
5.34 
6.00 
5.34 
2.67 

3.00 
116. 


70.00 
7.65 
5.34 
6.00 
5.34 
2.67 

3.00 
100. 


Schedule  of  Plant  Depreciation 


PROPERTY 


Depreciation  rate  for 
remainder. 


DIVISION 


KIND  OF  PROPERTY 


Property  subject 
to  salvage 
allowance 


Deduct  as 
salvage  before 
depreciating: 


Non- 
Fireproof 


Fireproof 


Real  Estate   

Mining  Rights 

Surveys  and  Maps  .. 

General  Office  

Organization  

Financing    

Railroad    

Openings  and  Hoists 

Tipple  Equipment    .. 

Power  Plant  


Shop  and  Equipment- 
Ventilating  Equipment 

Mine  Office   

Storehouse    

Stable  and  Live  Stock. 

Mine  Tracks  


Electric  Wiring 


Surfaced  Land  

Coal  in  fee 

Leased  coal  

Original  Maps,  Instru- 
ments and  Outfits 

Furniture  and  Fixtures.... 

Cost  of   same 

Cost  of   same 

Cost  of  same 

Openings  and  Shafts 

Ropes   and   Sheaves 

Hoisting  Engines  

Structure    

Equipment  

Building    

Pipe,  Heaters  and  Pumps 

Boilers  and  Settings 

Engines,   Dynamos,   and 

Switchboards    

Building    

Equipment    

Fan  Housing 

Fans  and  Drive 

Building    

Furniture  and  Fixtures.... 

Building    

Fixtures    

Building    

Fixtures    

Live  Stock  and  Harness.. 
Steel  Rails  and  Splices. 

Wood  Ties   

Steel  Ties  and  Spikes 

Labor,  Main  Roads 

Wood  Rails  

Trolley  and  Feed  Wire. 
Insulators,  Switches, 

and  Bonds  

Poles  and  Supports 

Labor  on  Mains 


All  30% 


Instruments  and 

Outfits  10% 

All  20% 


Rail  only  50% 

Ropes    &    Sheaves  10% 

Hoisting  Engines  15% 
Structural  steel 

only  20% 

Steel  only  10% 

Brick  &  Steel  only  10% 

All  10% 

All  10% 

All  20% 

Brick  &  Steel  only  10% 

A.11  10% 

Brick  &  Steel  only  10% 

All  10% 

Brick  &  Steel  only  10% 

All  10% 

Brick  &  Steel  only  10% 

All  10% 

Brick  &  Steel  only  10% 


All  50% 

All  107o 

Wire  only  50% 

All  10% 


8 
6 


6 
8 
5 
6 
6 


6 
6 


25 
8 

5 
10 
4 
8 
8 

4 

6 

5 

8 

4 

6 

4 

6 

4 

6 

20 

4 

20 

10 

25 

100 

6 

10 
10 
10 


•   •  :• 


Schedule  of  Plant  Depreciation 


PROPERTY 


Depreciation  rate  for 
remainder. 


DIVISION 


KIND  OF  PROPERTY 


Property  subject 
to  salvage  allowance 


Deduct  as 

salvage  before 

depreciating 


Non- 
Fireproof 


Fireproof 


Lighting  Equipment  .... 
Mine  Locomotives  

Mining  Machines  

Mine  Cars  

Wagons  and  Tools 

Safety  Appliances  

Telephone  Equipment  .. 

Dwellings     

Store  

Lubricating  Equipment 
Steel  Roof  Supports.... 
Mine  Pumps  and  Pipe.. 

Stone   and  Dirt 
Equipment 


Light  Wires  , 

Fixtures  and  Lamps 

Electric  Locomotives, 

Haulage,  Engines  

Ropes  and  Sheaves 

Cutting  Machines  

Wood  cars  

Steel  cars   

Wagons  and  Tools 

Safety  Appliances,  Fire 

Extinguishers    

Telephones  and 

Telephone  Lines  

Dwellings  , 

Building    

Retainers  and  Measure.. 

Steel    

Pumps  and  Drive 

Pipe  

Special  Cars  and 

Equipment    


All 
All 

All 
All 
AU 
AU 
AU 
All 

AU 

AU 
AU 
AU 

AU 
AU 
All 


AU 


20% 

5 

10% 

! 

6 

15% 

8 

10% 

25 

10% 

8 

10% 

20 

15% 

12 

10% 

20 

10% 

10 
10 

10% 

5 

4 

10% 

5 

4 
10 

20% 

10 

10% 

10 

5% 

20 

10% 

20 

D. 
D. 

D. 
D. 
D. 
D. 
D. 
D. 

D. 

D. 
D. 
D. 
D. 
D. 
D. 
D. 


D. 


DIGEST 

Coal  operators  lose  money  through  improper  methods  of  accounting. 

Coal  operators  should  charge  for  their  product  a  price  that  will  cover  the  cost  of  production  and 
the  risks  of  the  industry,  pay  interest  on  the  investment,  return  the  investment  and  a  reasonable  profit. 

Our  laws  protect  the  consumer  against  extortion  on  the  part  of  the  producer,  but  they  do  not 
protect  the  producer  against  the  folly  of  his  competitors. 

The  prudent  business  man  demands  for  his  product  a  price  that  will  pay  all  cost,  including  interest 
on  and  return  of  capital,  and  yield  to  him  a  profit. 

Because  of  certain  hazards  not  present  in  other  lines  of  business,  the  coal  operator  is  entitled  to  the 
largest  measure  of  profit. 

Cost  accounting,  as  applied  to  other  lines  of  business,  misleads  the  coal  operator. 

Coal  operators  mine  their  most  valuable  coal  first,  and  they  do  not  charge  a  royalty  in  proportion 
to  the  value  of  the  coal  mined. 

The  coal  operator,  unlike  the  manufacturer,  must,  at  once,  acquire  sufficient  raw  material  to  oper- 
ate a  long  period  of  years. 

The  coal  operator,  unlike  the  manufacturer,  because  of  constant  depletion  of  coal  and  of  rapid 
depreciation  of  plant,  cannot  keep  his  property  intact. 

The  value  of  coal  property  changes  from  various  causes,  and  a  narrowing  of  margins  always 
depresses  the  value. 

Coal  operators  frequently  confuse  themselves,  in  accounting,  by  not  separating  investment  in  rent- 
able buildings  and  inoperative  coal  rights  from  investment  in  the  coal  operation. 

Some  operators  mislead  themselves  and  suffer  loss  by  disregarding  plant  depreciation  and  interest 
on  investment,  and,  as  a  result,  they  sell  coal  at  prices  that  result  in  direct  loss. 

The  method  of  cost  accounting  should  enable  the  operator  to  accurately  determine  the  cost  of 
conducting  his  business,  which  should  include  a  reasonable  profit,  and  to  continue  the  operation  at  a 
profit  until  all  the  coal  is  mined. 

The  cost  of  production,  if  properly  computed,  will  indicate  about  the  same  selling  price  for  coal 
of  similar  grades,  regardless  of  ownership,  magnitude  of  operation,  probable  duration  of  operation, 
and  physical  conditions. 

Variations  in  total  cost,  if  properly  computed,  may  obtain  as  between  producers  of  different  dis- 
tricts producing  various  grades,  but  not  as  between  producers  of  the  same  grade,  consequently,  the 
selling  price  should  not  vary  more  than  the  cost. 

When  the  coal  operator  sells  coal  at  less  than  cost,  in  order  to  keep  his  mine  running,  he  simply 
disposes  of  a  portion  of  his  property  without  compensation. 

When  the  operator  sells  coal  at  a  low  price,  because  his  mine  is  new  and  his  primary  cost  low,  he 
suffers  a  loss  even  though  he  believes  he  is  making  a  profit. 

When  the  operator  sells  coal  at  less  than  cost,  depending  on  an  enhancement  in  value,  he  will  be 
disappointed,  because  he,  by  his  act,  prevents  what  he  is  depending  upon  and  hoping  for. 

The  operator,  to  make  good,  must  earn  sufficient  during  the  earlier  years  of  his  operation  to 
amortize  a  large  part  of  his  investment  and  reduce  his  interest  charge. 

The  only  safe  course  is  to  sell  coal  at  a  price  that  will  cover  all  costs,  properly  computed,  included 
in  which  is  a  reasonable  profit. 

A  tract  of  10,000,000  tons  of  coal  that  cannot  be  mined  at  a  Primary  Cost  and  marketed  at  a  Sell- 
ing Price  to  permit  an  initial  royalty  of  12  cents  cannot  have  an  average  value  of  6  cents,  nor  can  it 
all  be  mined  at  a  profit. 

The  PRIMARY  COST  of  operation  is  represented  by  actual  expenditures  made  in  the  ordinary 
course  of  operating  but  should  not  include  interest   or  payments  on  borrowed  capital. 

The  SECONDARY  COST  of  operation  consists  of  proper  charges,  against  the  product,  for  plant 
depreciation,  coal  depletion,  interest  on  investment  and  capital,  risk  of  the  industry,  and  a  reasonable 
profit. 

The  proper  SELLING  PRICE  is  the  sum    of  the  PRIMARY  and  SECONDARY  costs. 

The  SECONDARY  COST,  or  margin  between  SELLING  PRICE  and  PRIMARY  COST,  of  a 
standard  grade  of  coal,  of  the  best  quality  and  with  the  most  favorable  physical  conditions,  determines 
the  basic  value  for  coal  of  that  grade,  the  value  being  modified  as  adverse  physical  conditions  increase 
Primary  Cost  and  as  poorer  quality  reduces  the  Selling  Price. 


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